NATIONAL COUNCIL OF LEGISLATORS FROM GAMING STATES
COMMITTEE ON LOTTERIES
LAS VEGAS, NV
JANUARY 4, 2013
1:00 P.M. – 1:45 P.M.
The Committee on Lotteries of the National Council of Legislators from Gaming States (NCLGS) met at the Rio All Suites Hotel & Casino in Las Vegas, Nevada, on Friday, January 4, 2013, at 1:00 p.m.
Representative Kevin Ryan from Connecticut, Chair of the Committee, presided.
Legislators present included:
Rep. James Buskey, AL
Sen. Roderick Wright, CA
Rep. Helen Keeley, DE
Rep. Joe Gibbons, FL
Sen. Garrett Richter, FL
Rep. Perry Thurston, FL
Rep. Jim Waldman, FL
Rep. Alan Williams, FL
Sen. Jeff Danielson, IA
Others present were:
Susan Nolan, Nolan Associates, NCLGS Executive Director
MINUTES
The Committee accepted the minutes of its last meeting on June 15, 2012, in New Orleans, Louisiana.
STATE AND FEDERAL LOTTERY INITIATIVES/PRIVATIZATION EFFORTS
David Gale, Executive Director, North American Association of State and Provincial Lotteries (NASPL0), reported that 2012 was an interesting year for lotteries, particularly in regard to what happened in Washington, D.C. He said that in December 2011 the Department of Justice (DOJ) released a letter to the New York and Illinois lotteries clarifying provisions of the Wire Act. He said the letter, responding to a request two years earlier by the lotteries, clarified that the Wire Act had no bearing on online lottery sales and that lotteries could sell their products online.
Mr. Gale said that since then, several lotteries have been exploring such a possibility. He said that two states to date— Illinois and Georgia—were offering products online. He said that Georgia came up in late November with an initial kickoff date of last week. He said that the Illinois lottery came up in February or March of last year. He said the lotteries were not offering all products on the internet at once, that they were rolling the products out gradually.
Mr. Gale said that the lottery industry is not for or against Internet wagering but favors decisions that have been made within the states’ borders—and that gaming is a states’ rights issue. He said that this applies to not only the games allowed in the states but also the way the games would be delivered to the states’ constituents, whether online or by retail network.
Mr. Gale said regarding federal legislation that the most recent Reid-Kyl bill would establish a commission under the federal umbrella and give the right to Nevada to license other online poker outlets to sell over the Internet. He said the only lottery games that would be allowed under Reid-Kyl were those games that had no more drawings than one per day.
Mr. Gale said that recently, for the first time, the lottery industry went to D.C. to talk to lawmakers on the Hill in a concerted effort to give their position on a federal bill. He said that states have come to rely on revenue from the lotteries and to put that at risk would negatively impact the lotteries. He said the risk would come because under Reid-Kyl, lotteries would have to pay fees for licenses—and that would come from the states. Mr. Gale also said that it is an infringement of states’ rights when the federal government tries to dictate issues related to wagering within state borders. He noted that state lotteries should be at the table in any discussion that would affect lottery wagering. He added that lotteries are in great support of a bill passed to prohibit offshore internet gaming.
Mr. Gale reported that Reid decided to pull his bill because he was not gaining the kind of support he wanted. He said that the fiscal cliff also was a factor and that the bill was packaged as something that could be attached as a must-pass bill because it had not been officially introduced in the House of Representatives. He said that lotteries have been assured that the bill will come up again.
LOTTERY PRIVATIZATION
Mr. Gale said that lottery privatization is not a new concept, that it is really outsourcing, and that it just has been given another name. He said that organizations like lotteries have subcontractors to provide services to the organization, like the delivery of instant tickets for the Texas Lottery or the maintenance of a sales force. He said that Indiana and Illinois are now under private management—meaning that they have another organization that they work with to generate revenue and maximize profits for the state.
Mr. Gale said that federal legislation says that a state lottery must still be in control of the day-to-day activities of the organization. He said that even though there is a private management team, a representative of the state still serves as CEO and government employees still serve the organization. Mr. Gale said that one big difference is that many folks who were originally state employees have been hired by the new management team.
Mr. Gale noted relevant questions that are being asked about privatization, such as: Are lotteries cashing in on revenues that a lottery might generate in future years? He said it is a vital question, as a governor has a fiscal responsibility to the state and to next governor who will need to maintain that same kind of fiscal responsibility. Mr. Gale said another question being framed is: What could a new management team do that the existing management team is not able to do?
Mr. Gale said that lotteries are either a Coke or a Pepsi, though most folks don’t see them that way. He said that lotteries vie for footprint space in a retail establishment like other consumer goods, such as Coke and Pepsi, do. He said that “pay-at-the-pump” has been very detrimental for lotteries because it has dramatically reduced foot traffic. Mr. Gale said that a company has developed a unit that is being tested in Minnesota that would allow you to purchase at the pump.
Mr. Gale said that the emerging market has a great impact. He said that mostly everything is going to be transferred to mobile/cellular phones. He said that the U.S. is behind the times and that other parts of the world are already using cellular phones to purchase many different products. Mr. Gale said that lotteries do not want to increase sales by taking more money from existing players, and that they want to open new markets and increase their player base.
Mr. Gale said that some people object to government involvement in lottery wagering. He said that credibility has been added to lotteries by government involvement. He said that states have the track record and ability to regulate games that are safe and secure. He said that lotteries in the U.S. are a bit behind but that he has great faith in the industry and the regulators who help oversee it and that if lotteries are allowed to be competitive with other products, they will survive and succeed.
Mr. Gale said that the American Gaming Association (AGA) said that lotteries are unable to regulate games of the magnitude of Internet sales. He said that currently, lotteries regulate Mega Millions and Powerball. He said that lotteries have the track record and ability to regulate games that are safe and secure, whether they are games of chance solely within states borders in brick-and-mortar establishments or offered over the Internet.
In response to a question from Rep. Gibbons relating to what would be gained by privatizing a successful lottery in a state like Florida when the state already enjoys good revenue from its lottery, Mr. Gale said that an outsourcing group may offer further profits.
Chris Shaban from International Gaming Technology (IGT) said that the reason why a host of states have approached the industry and looked at different models for generating additional revenue without expanding gaming is that the industry has resources that state governments do not. He said this can make a lottery more successful while maintaining the original lottery structure. Mr. Shaban said outsourcing is not a dramatic change in structure. He said the Hoosier Lottery went from outsourcing 85 to 86 percent to outsourcing 91 to 92 percent, as well as moving some lottery employees to the private sector. Mr. Shaban said Indiana, Illinois, New Jersey, and Pennsylvania all have different models.
Eli Nortelus, Public Policy Advisor with Akerman Senterfitt, said that the Florida Lottery looked at providing an upfront cash incentive when considering privatization or outsourcing, but decided not to go that route because the lottery felt it could make the money on its own over a period of time.
Senator Wright noted that on a financial basis, there is a potential for the positive because when you privatize, you frontload your resources and shift the risk to the entity that gave you the revenue. He said a state could borrow against a lottery that it owns—at no costs. He said that questions that then arise are: Will the lottery become more profitable? Did I sell short? Is the upfront capital that I need worth the risk?
Mr. Gale said that in the 1990s, those lotteries that came into existence were created as corporations owned and operated by the states. He said that put their employees outside the typical realm of a government employee and gave the lotteries flexibility to do what they could to provide incentive programs to retail networks and employees. Mr. Gale said that all fell by the wayside as money became tight and lotteries had to tighten their belts. He said that Georgia was one of the states that did away with its incentive programs about six months ago.
CONVERGENCE OF LOTTERIES AND GAMING
Michael Pollock, Managing Director, Spectrum Gaming Group, spoke to three facets of the relationship between lotteries and casinos—coexistence, competition, and convergence. He said that historically, most lotteries and casinos operated in peaceful coexistence, in separate silos, and paid little attention to each other.
Mr. Pollock noted, though, that in many states casinos and lotteries were viewed as competitors. He said that is why there is no lottery in Nevada. He said that in Connecticut, the lottery views the two tribal casinos as competitors and that he feels this is a lost opportunity. Mr. Pollock said that in Florida the lottery and casinos see themselves as fighting for the same gambling dollars. He said that it is an entirely different experience, and that you don’t decide on Friday night to either go to a casino or play the lottery.
Mr. Pollock said that the inevitable emergence of online gaming creates a convergence and asked whether this is to be a crash or a smooth dovetailing. He said that a coordinated approach would be the correct way to do it. He noted that in some states, convergence would be easier than in others and that those states will be the ones that have one agency, usually a lottery agency, which oversees both lotteries and casinos.
Mr. Pollock said that lotteries basically have two products—a draw product and an instant product—and that competition will become more real as lotteries move forward into Internet gaming. He submitted that the games that people will be playing five years from now have yet to be invented and that an instant product that goes online in effect becomes a slot machine.
Mr. Pollock said that last year he testified before the U.S. Senate Indian Affairs Committee that as Internet gambling advances, it should be developed to the benefit of land-based casinos. He said that this would advance multiple public policy streams, as both lotteries and casinos are purveyors of public policy.
Mr. Pollock said that rather than just being a revenue stream, Internet gambling provides an opportunity for land-based casinos to identify and motivate people to come to casinos. He said that all things being equal, using the Internet as a low-cost means of identifying and marketing to land-based customers will not only be more likely to advance other public policy goals, it will be more likely to generate more sales/revenue online than it would otherwise.
INNOVATIONS IN NON-TRADITIONAL LOTTERIES
Jim Breslo, President and CEO of Diamond Game, spoke to products designed for age-regulated entertainment locations. He said that age-regulated entertainment locations include bingo halls, racetracks, OTBs, veteran, charity and fraternal halls, as well as bars and taverns. He said that age-regulated entertainment locations are stay-and-play social environments, are already age-controlled, have built in service staff, are attended by people who plan to use disposable income, and already have experience with electronic games, e.g. arcade games, pinball machines, etc.
Mr. Breslo updated the Committee on non-traditional product initiatives in Minnesota, Idaho, Virginia, Maryland, Kentucky, and Ontario.
Minnesota Electronic Pull-Tabs, or E-Tabs
Mr. Breslo said that Minnesota borrowed $348 million to fund a new Vikings Stadium and that the Minnesota legislature approved e-tabs to help fund the stadium. He said that initial projections forecasted 15,400 e-tabs upon full deployment. He said that as of December 2012, 336 e-tabs were in operation. He said that current e-tabs are averaging $199 in gross sales per day.
Mr. Breslo said that an e-tab is a handheld and portable electronic device that is used to play purely electronic pull-tab games and that a player pays money to an operator to load credits on the device. He said the player then plays the credits on the device to purchase e-tab tickets one at a time and that money is paid to players when the device is returned with a cash credit balance. He noted that winning e-tab tickets are redeemed instantly by automatically adding cash credit to the hand-held device.
Mr. Breslo said the e-tab devices may be used at bars, off-sale liquor stores, or bingo halls and that they are limited to certain quantities per site, i.e., six for sites with less than 200 seating capacity, 12 for sites with 200 or more seating capacity, and 50 for bingo halls that contain at least 100 seats. He said the e-tabs cannot contain spinning reels or any other entertaining video depiction and that all e-tab results must be predetermined and finite.